SCP-CQR Merger? 'Anchors Aweigh' Per annum total returns 10.8% Charter Hall Retail Sub-regional centre - unlevered

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1 Asia Pacific/Australia Equity Research REITs Research Analysts Mikhail Mohl mikhail.mohl@credit-suisse.com Ian Randall ian.randall@credit-suisse.com Martin Patz martin.patz@credit-suisse.com Specialist sales: Bhupen Master bhupen.master@credit-suisse.com SCP-CQR Merger? M&A PROPOSAL 'Anchors Aweigh' With physical market asset pricing making acquisitions difficult to justify and given SCP already owns a 4.9% stake in CQR, we have undertaken a detailed assessment of the financial and strategic merits of a merger transaction. Figure 1: Total returns Dec-12 to Dec-16 ( in NTA plus distributions) 15.0% 13.0% Per annum total returns 11.0% 9.0% 10.8% 12.5% Charter Hall Retail Sub-regional centre - unlevered 13.7% 14.3% Shopping Centres Australasia Sub-regional centre - levered Source: Company data, JLL Research, Credit Suisse estimates SCP has outperformed CQR. Since listing, SCP has generated a total return ( in NTA plus distributions) of 13.7%pa and outperformed CQR by 300bp. SCP's outperformance is more impressive when we consider (1) CQR's more productive and larger asset base, (2) CQR has undertaken more NTA & EPS accretive equity issuance, and (3) CQR's cap rates have compressed by more than SCP's (including Dec-16 revaluations). Fee leakage is largely responsible. CQR has generated the lowest NTA ps uplift of the passive A-REITs since FY12 despite its exposure to retail assets where re-pricing has been greatest. Whilst capital losses associated with offshore disposals (~13cps) is partly to blame, CQR's equity has been heavily eroded by ~$158m of related party fees over the past 4 years. Merger makes sense. A merger between these Groups would create a more relevant investment proposition for both debt & equity investors. At current pricing, we believe a scrip-funded merger is earnings & value accretive for both CQR & SCP shareholders. Whilst MT earnings accretion would be greater for SCP (+13-19% vs +4-9% for CQR), CQR investors should benefit from markedly higher (lower) NAV/NTA creation (dilution) going forward with minimal NTA erosion from this transaction (CSe ~1%). MergeCo still fundamentally expensive. At current pricing, we estimate MergeCo is worth $2.10, a slight premium to our stand-alone SCP SOTP valuation ($2.04) but is still pricing in further yield compression (19bp) to already 'peak cycle' book values (Dec-16). At this point in the cycle, we see better value and thematic appeal in SCG, WFD, MGR & GMG. Reduce CHC TP to $4.45 (from $4.60). Our reduced TP reflects the potential value "at risk" associated with CQR's FUM, which represents 15% & 20% of FY16A FUM and FM EBIT on our estimates, respectively. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Table of contents 'Anchors Aweigh' 3 The numbers favour SCP...3 Exposures in focus...4 CQR's NTA has been eroded on a number of fronts...6 SCP has delivered more with less...9 A SCP-CQR merger makes sense 11 Merger Rationale...11 Tough to justify on-market acquisitions...13 Merger pricing and considerations...14 MergeCo worth $2.10 (CY17 SOTP)...15 Still fundamentally expensive...17 MergeCo Financial Forecasts...18 Appendices 22 CQR related party fees...22 Standalone Net Asset Valuations 23 SCP $2.04, UNDERPERFORM...23 CQR $4.00, UNDERPERFORM...24 CHC $4.45, UNDERPERFORM...25 Standalone Financial Forecasts 26 Shopping Centres Australia (SCP.AX)...26 Charter Hall Retail (CQR.AX)...27 Charter Hall Group (CHC.AX)...28 Charter Hall Group (CHC.AX / CHC AU) 32 Charter Hall Retail REIT (CQR.AX / CQR AU) 33 SCA Property Group (SCP.AX / SCP AU) 34 SCP-CQR Merger? 2

3 A powerful but simple measure of value extracted from the underlying real estate 'Anchors Aweigh' The numbers favour SCP By measuring the cumulative total return based on the change in net tangible assets (NTA) per security plus distributions, we can compare the total return profile for both Shopping Centre Australia (SCP) and Charter Hall Retail (CQR) shareholders over-time and also cross-check this with physical market asset returns (for comparable real estate). Importantly, we believe this is an appropriate and effective measure, which over-time provides a clear insight into the aggregate value extracted (and distributed) from the underlying real estate. We note for example that Groups who chase or boost short-term earnings growth at the expense of their balance sheet will be exposed on this measure as will businesses which consistently generate profits that exceed cash flow generation due to excessive capitalisation of costs or favourable (and potentially questionable) earnings definitions. SCP has outperformed CQR by 300bp per annum since listing Since listing in October 2012, SCP has generated a total return (change in NTA plus distributions) of 67.4% (13.7%pa) compared with 50.4% (10.8%pa) for the externally managed CQR. The 300bp per annum spread in performance between these Groups is considerable and has been steadily widening overtime as illustrated in Figure 2. We note that these estimates include the recently announced (post June 2016 balance date) and significant portfolio revaluations for the 6 months to December 2016, which in isolation boosted CQR and SCP's last stated (June 2016) NTA per security by 8% and 11%, respectively on our estimates. Figure 2: SCP vs CQR vs Sub-regionals Indexed returns based on change in NTA plus distributions Figure 3: Who has created the most value? Change in NTA plus distributions since Dec Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 SCP - (Change in NTA + Distributions) JLL Sub-regional total return - unlevered June 2016 balance date Dec-16 revaluations CQR - (Change in NTA + Distributions) JLL Sub-regional total return - levered 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 10.8% 12.5% Charter Hall Retail Sub-regional centre - unlevered 13.7% Shopping Centres Australasia 14.3% Sub-regional centre - levered Source: Company data, JLL Research, Credit Suisse estimates Source: Company data, JLL Research, Credit Suisse estimates SCP has generated real estate type returns for its investors Interestingly, SCP's total return profile has been broadly consistent with physical asset total returns (Figure 3) on our estimates, un-levered and levered Australian sub-regional shopping centres have delivered total returns (capital value and income) of 12.5%pa and 15.3%pa, respectively since December For the purpose of this analysis, we utilised JLL's sub-regional capital values index (CVI) as a proxy for capital returns (asset and equity) and cap rates for income returns. Our income estimates have been adjusted by several assumptions including average occupancy of 97%, operating capex (maintenance capex and tenant incentives) of 60bp per annum, initial gearing of 30% and a weighted average cost of debt (WACD) of 4.2%. SCP-CQR Merger? 3

4 More impressive considering CQR value leakage is even greater than first thought given Interestingly, SCP's relative outperformance versus CQR is actually more impressive considering: CQR's portfolio (asset) base is ~30% larger, CQR's higher portfolio quality portfolio, turnover rent prospects and exposure to Coles, CQR has undertaken more NTA accretive equity raisings, and CQR's cap rates have compressed by ~180bp vs ~150bp for SCP. Exposures in focus Figure 4: Head to head CQR & SCP key statistics (December 2012 to June 2016) Shopping Centres Australia Charter Hall Retail 31-Dec Jun-16 Change 31-Dec Jun-16 Change Pricing Units Share Price A$ % % Market Cap A$m 878 1,608 83% 1,256 1,706 36% Shares on issue million % % NTA per security A$ % % Debt Summary Gearing % 34.0% 34.0% 0% 38.7% 35.9% -7% Cost of debt % 5.7% 3.7% -35% 6.0% 4.3% -28% % Debt Hedged % 90.0% 68.4% -24% 72.0% 72.0% 0% Interest coverage ratio EBIT/Int exp % % Portfolio Summary Investment Portfolio A$m 1,406 2,142 52% 2,059 2,535 23% WACR % 8.10% 7.13% -12% 8.41% 6.71% -20% WALE years % % Occupancy % 95.0% 98.6% 4% 98.5% 98.0% -1% AU Investment Portfolio A$m 1,406 1,956 39% 2,059 2,163 5% Exposure to Woolw orths % 61% 46% -25% 28% 26% -7% Exposure to Wesfarmers % 0% 9% n.a 25% 25% 1% Specialties % total % 27% 45% 67% 47% 49% 4% Specialty rent per sqm A$ n.a n.a % We note that CQR's portfolio is 27% (~550m) larger than SCP's and has more balanced exposures between sub-regional and neighbourhood centres in addition to anchor tenants Woolworths and Wesfarmers relative to SCP. Figure 5: CQR's asset base is almost 30% bigger A$m 3,000.0 Figure 6: And a more balanced exposures % of portfolio base rent 100% 2, % 80% 46.0% 49.3% 2, , , % 8.0% 1, , , % 20% 46.0% 24.8% 25.9% 0.0 SCP CQR 0% SCP CQR Freestanders Neighbourhoods Sub-Regionals Woolworths Wesfarmers Specialties & Other SCP has been actively increasing its exposure to Wesfarmers and Coles anchored centres by way of acquisitions and disposals (i.e. SURF1 and NZ transactions). As at June SCP-CQR Merger? 4

5 2016, Woolworths represents 46% of SCP's portfolio base rent compared with 61% when it was listed (October 2012). CQR's specialty productivity growth has helped lift rents CQR's asset base should have generated higher income growth relative to SCP in recent years as a result of turnover rent from anchors in addition to strong specialty rent growth following the considerable increase in specialty sales productivity (+32%) and specialty rent per square metre (+17%). Rent generated from anchor sales turnover represented 2.5% of total rent for CQR in the 12 months to June 2016 compared with 0.6% for SCP. We note that 31% of CQR's anchor tenants (as at June 2016) are paying turnover rent and more often than not, CQR have been successful in converting this growth into the base rent component. Figure 7: Specialty productivity & occupancy costs CQR's portfolio generates 26% higher spec sales vs SCP Figure 8: CQR specialty productivity and occ costs Which has helped underpin CQR's specialty rent growth Specialty occupancy costs 20.0% 18.0% 16.0% SGP VCX 14.0% 12.0% GPT SCG MGR 10.0% SCP CQR 8.0% 6.0% 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 11,500 Specialty sales ($/psm) 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 2H10 1H13 1H10 2H12 2H11 1H12 2H13 1H14 1H15 2H15 2H14 1H16 2H16 7.0% 7,250 7,750 8,250 8,750 9,250 9,750 Where did it all go?? CQR's NTA growth is underwhelming given the magnitude of cap rate compression Interestingly, despite the fact that CQR's portfolio has benefitted from significant cap rate compression relative to A-REIT peers in recent years (Figure 9), its NTA per share growth has considerably lagged (Figure 10). Figure 9: Retail WACR Jun-12 to Jun-16 CQR & SCP have seen the most cap rate compression 10.00% 8.00% Figure 10: NTA per share growth FY12 to FY16 Yet CQR's NTA growth has considerably lagged peers 14.0% 12.0% 6.00% 10.0% 4.00% 2.00% 0.00% 8.0% 6.0% Average for passive A-REITs -2.00% -0.42% -0.58% -1.00% -1.14% -1.15% -1.48% -1.78% 4.0% -4.00% Scentre Group GPT Group Stockland Group BWP Trust Mirvac Group SCA Property Group Jun-12 Jun-16 (Dec-16 for SCP & CQR Change Charter Hall Retail REIT 2.0% 0.0% GMG CHC BWP IOF DXS SCP CMW GPT VCX MGR CQR SGP. N.B CQR and SCP's cap rates include an additional 29bp and 51bp of compression since June Since June 2012, CQR's Australian retail portfolio cap rates have compressed by ~180bp or ~150bp excluding the recently announced (December ) portfolio revaluations which compares to ~150bp (~100bp excluding Dec-16 revaluations) for SCP and ~85bp on average for retail portfolios of other A-REITs. In our view, this is not surprising given the sheer magnitude of transactional activity in freestanding, neighbourhood and sub-regional centres in recent years. Therefore, (all else equal), it would be fair to assume that CQR SCP-CQR Merger? 5

6 CQR's cap rates have compressed more than SCP's should have generated strong NTA growth over this period relative to A-REITs with comparable capital structures and distribution policies. However, CQR's NTA of $3.79 as at June 2016 has increased by only 12.1% or 2.9%pa since June 2012 compared with 5.0%pa for SCP and 4.8%pa on average for A-REITs (excluding GMG, CHC and WFD). On this basis, CQR has generated the lowest NTA per share uplift out of the passive A-REITs since Jun-12 despite its exposure to retail assets (and asset classes) where re-pricing has been greatest. Figure 11: Retail cap rate compression since % Figure 12: CQR vs SCP Australian retail cap rates 8.50% 2.00% 1.98% 1.83% 1.82% 8.00% 1.50% 1.35% 1.16% 1.13% 7.50% 1.00% 7.00% 0.50% 6.50% 0.00% JLL Neighbourhood Cap Rate CQR - Neighbourhood CQR - Subregional SCP Neighbourhood SCP Subregional JLL Sub-regional Cap Rate 6.00% Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 CQR SCP Source: Company data, JLL Research, Credit Suisse estimates CQR's NTA has been eroded on a number of fronts We have illustrated the components behind CQR's NTA ps movement between June 2012 to June 2016 in Figure 13 in order to reveal the key positive and negative drivers. Figure 13: Charter Hall Retail NTA ps movements June 2012 to December 2016 Cents per security $4.30 $ $3.90 $ $3.50 $ $ $ $2.70 $2.50 FY 12 NTA NTA uplift from capital raising Retained earnings & other Property valuations European business exit Acquisition costs & losses on sales MTM of derivatives FY16 NTA Dec-16 revaluations Proforma NTA We note that positive net property revaluations of $228m (Pre Dec-16) over this period boosted CQR's NTA per security by 63cps or 19%. Interestingly, $388.9m of net equity SCP-CQR Merger? 6

7 Equity issuance has added 8c to CQR's NTA capital issuance over this period was executed at a 13% premium to NTA on average and boosted CQR's NTA by 2.5% or 8cps ($30m), on our estimates. Retained earnings and other factors added a further 5cps which combined with positive revaluations and NTA accretive equity issuance increased CQR's NTA to $4.13 (prior to any negative impacts from losses on sales, mark-to market movements on derivatives, etc.). We note that CQR independently revalued 65 properties or 100% of the stabilised portfolio in December 2016, resulting in total valuation uplift of $130m or 31cps on our estimates (ceteris paribus). Figure 14: NTA accretive equity capital issuance since June 2012 has boosted CQR's NTA by 8cps Type Date Period Raise price NTA ps Premium / Discount NTA accretion A$m No shares Proceeds Placement issue 1-Jul-15 FY % DRP Issue 1-Jul-15 FY % Placement issue 1-Jul-15 FY % DRP Issue 1-Jan-16 FY % DRP Issue 1-Jul-14 FY % DRP Issue 1-Jan-15 FY % DRP Issue 1-Jul-13 FY % Placement issue 1-Jul-13 FY % Placement issue 1-Jan-14 FY % DRP Issue 1-Jan-14 FY % Placement issue 1-Jul-12 FY % Unit Purchase Plan 1-Jul-12 FY % DRP Issue 1-Jan-13 FY % Source: Company data, IRESS, Credit Suisse estimates What's behind the NTA erosion? Offshore asset sales crystalised losses Related party fees The key negative drivers which have eroded CQR's NTA include property transaction costs and fees, capital losses associated with offshore asset sales and unfavorable derivative movements and break costs associated with out-of-the-money interest rate derivatives. In aggregate, we estimate these factors wiped off 11% or 36cps from CQR's NTA per security. On our estimates, CQR paid $158m of related party and other transactional fees over the past four years to Charter Hall Group (CHC.AX). Interestingly, what isn t entirely clear in our view is the quantum of fees that are expensed through the P&L (and recognised in Funds From Operations) versus capitalised. Regardless of how much is expensed versus capitalised from year to year, by looking at the cumulative growth in tangible equity and distributions paid over-time we can compare the total returns extracted from CQR's real estate on behalf of CQR shareholders versus other A-REITs (including SCP of course). Figure 15: Related party fees to Charter Hall Group Fees paid to CHC Property mgmt & fund related fees Responsible Entity Fee Other Other related party fees Total Period A$m A$m A$m A$m A$m FY FY FY FY Total Capital losses incurred from asset sales and transaction costs associated with exiting Europe and the United States over June 2012 to June 2015 negatively impacted CQR's NTA per security by ~13cps ($59m), on our estimates. SCP-CQR Merger? 7

8 Transaction costs Development Caboolture development and disposal was highly NAV/NTA dilutive 16 January 2017 Specifically, we also point to the recent sale of Caboolture (Qld) as one example of an asset which in isolation was heavily dilutive to CQR's tangible equity on a number of fronts (i.e. development fees, disposal fees and capital losses associated with the development and the eventual disposal). Caboolture was sold in November 2016 for $27.5m, in-line with the June 2016 "held for sale" book value but a 30% ($12m) discount to the June 2015 book value and an even greater 40% discount to our estimate of the total capital invested in the asset following the $18m development undertaken over FY15. On our estimates, CQR dusted $18.4m or 103% of the incremental development spend on this centre over FY13 to FY15. We note that the forecast completion timing, costing and income assumptions deteriorated throughout the course of the development. Figure 16: CQR: Caboolture development summary Caboolture Development Summary Developer Ow ner Project Charter Hall Charter Hall Retail Caboulture, QLD Description Full centre and majors refurbishment and remixing of specialty tenants Original expected completion Aug-14 Actual completion date Jun-15 Original stabilised yield forecast 10.20% Latest stabilised yield forecast 8.50% Original forecast spend A$m 15.2 Total spend A$m 17.8 Book value - pre development 28.1 Pre-dev't book value plus spend 45.9 Book value - June Disposal price 27.5 Capital loss Capital loss % development spend 103% Figure 17: Caboolture development time-series Caboolture Jun-13 Dec-13 Jun-14 Dec-14 Dec-15 Jun-16 Sale Price Total Forecast spend $Am Forecast Stabilised yield (RHS) 10.20% 10.20% 9.10% 9.70% 8.50% Book value / Disposal price Status Planning 20% of spend completed 50% of spend completed Construction complete. 95% leased, in line w ith On market for disposal yr 1 stabilisation On market for disposal SOLD forecasts SCP-CQR Merger? 8

9 Figure 18: Caboolture invested capital vs book value Figure 19: Caboolture invested capital vs book value Jun-13 Dec-13 Jun-14 Dec-14 Dec-15 Jun-16 Sale Price Jun-13 Dec-13 Jun-14 Dec-14 Dec-15 Jun-16 Sale Price Book value / Disposal price Costs including additions Original Book value Development Capital gain (loss) Despite fewer tailwinds Big reval uplift in Dec some catch-up? SCP has delivered more with less SCP has generated NTA per security growth of 5.0%pa since listing, slightly above the 4.8%pa A-REIT sector average (excluding WFD, GMG and CHC) and markedly above CQR (2.0%pa). Notably, this is despite its smaller and arguably less growth generative asset base and the fact that cap rate compression and NTA accretive equity raisings have been less of a tailwind over this period for SCP, on our estimates. We note that SCP revalued its entire portfolio in December 2016, resulting in total valuation uplift of $169m or 22cps on our estimates (all else equal). We estimate this increased proforma NTA at 30 June 2016 to $2.14. Figure 20: Shopping Centres Australasia NTA ps movements June 2012 to December 2016 Cents per security $2.20 $2.10 $2.00 $ $ $1.70 $1.60 $ $ $1.30 $1.20 FY12 NTA NTA uplift from capital raising Retained earnings & other Property valuations MTM of derivatives Acquisition costs & losses on sales FY16 NTA Dec-16 revaluations Proforma NTA SCP-CQR Merger? 9

10 Figure 21: NTA accretive equity capital issuance since June 2012 has boosted SCP's NTA by 3cps Raise Premium / NTA accretion No Type Date Period price NTA ps Discount A$m shares Proceeds DRP Issue 28-Aug-15 FY % DRP Issue 29-Jan-16 FY % Institutional placement 18-Jun-15 FY % Unitholder Purchase Plan 9-Apr-15 FY % DRP Issue 30-Jan-15 FY % Institutional placement 29-Nov-13 FY % Institutional placement 13-Jun-13 FY % SCP-CQR Merger? 10

11 A merger at current pricing looks attractive for both SCP & CQR investors A SCP-CQR merger makes sense Merger Rationale Parking capital, or is there more to it? On November , SCP disclosed that it had acquired a 4.9% stake (19.9m units) in CQR (on-market) at an average price of $4.19, over a 5 week period. SCP funded the $83m investment in CQR with the residual capital from the NZ portfolio divestment (A$253m) post $169m of domestic Neighbourhood centre acquisitions. SCP noted at the time that physical market transactional activity had slowed into year-end, making CQR an attractive use of capital for a transient period. However, given the significant fee and hence value leakage associated with CQR's external management structure, we believe SCP may (and should) consider putting forward a merger proposal. On our estimates, a scrip-funded merger would be earnings and value (NTA and NAV) accretive for both CQR and SCP shareholders based on bid premium scenarios of nil to 10%. In our view, this is likely to be palatable for both SCP and CQR investors given the relatively low execution (/implementation) risks arising from the highly complementary asset base and capital structures. Highly complementary portfolios Figure 22: CQR and SCP Australian Retail Portfolios Cap rates & book values as at June 2016 SCP and CQR own and manage a similar portfolio of real estate assets as illustrated in Figure 22, which if combined should generate meaningful scale benefits both at the property (property management fee savings etc) and corporate levels, in our view. 9.00% CQR Core Assets CQR Disposal Assets (CSe) SCP Aus Portfolio 8.50% 8.00% 7.50% Book Cap Rate 7.00% 6.50% 6.00% 5.50% 5.00% Book Value SCP-CQR Merger? 11

12 SCP keen to launch 2 new funds pa from FY18+ Growing managed FUM beats paying away transactional fees MergeCo could reduce its financial leverage whilst growing managed FUM CQR's targeted disposals could seed new SURF funds & reduce MergeCo's gearing At its FY16 result in August 2016, CQR outlined a strategy to release capital by divesting around $200m of its smaller and lower growth freestanding centres in order to fund acquisitions of higher growth and larger more dominant neighbourhood and sub-regional centres. In December 2016, CQR announced the disposal of 3 centres for $56.3m and the acquisition of Arana Hills, a sub-regional centre for $67.1m. Interestingly, SCP has a similar quantum of assets which are <$15m in value, albeit are defined as neighbourhoods (rather than Freestanders) despite having a similar retail Gross Lettable Area (GLA). SCP has previously stated that some of these assets may seed new SURF funds which would help SCP achieve its target of establishing 2 new funds per annum from FY18. Notably, the creation of SURF 1 was seeded with all but one of SCP's Australian freestanding assets and SURF 2 which is expected to be launched in FY17 will be seeded by the remaining freestanding centre (Katoomba). Similarly, the sale of the New Zealand portfolio of freestanding centres was recycled into $169m of Australian neighbourhood acquisitions (and the $83m investment in CQR). However, whilst SCP has also been divesting freestanding assets its acquisition strategy is slightly different to CQR in that it is willing to acquire smaller neighbourhood centres (i.e. $20-40m). Interestingly, Figure 22 illustrates the considerable pool of assets across both portfolios which could (in theory) seed the creation of new SURF funds. By selling Freestanding assets into new funds, MergeCo could take advantage of the cycle by crystalising strong asset pricing in order to de-lever MergeCo's balance sheet at this point in the cycle. We would view this as a prudent and value (NTA and NAV) accretive strategy. CQR has been an asset accumulator until recently CQR s asset recycling strategy took the market by surprise given the group s long track record of asset accumulation. Albeit, we accept that in recent years, CQR has shifted more towards acquiring larger neighbourhood and sub-regional centres. We note that since FY12, CQR has acquired $966m of Australian shopping centres and disposed of only $62m (i.e. 15:1) and in 2015 reduced its acquisition hurdle rate from >10% to >8.5%. Figure 23: CQR Acquisition & Disposals FY12-1H17 Figure 24: Retail cap rates have converged 1, ,000.0 Acquisitions Disposals 9.25% 8.75% % 7.75% 7.25% % FY12 FY13 FY14 FY15 FY16 1H17 Cumulative (FY12-1H17) 6.25% 5.75% 5.25% CQR Portfolio JLL Neighbourhood Transactional evidence SCP Portfolio JLL Sub-Regional 4.75% Selling freestanders is a no brainer given current pricing Source: Company data, JLL Research, Credit Suisse estimates Fully priced Freestanders also have the greatest growth headwinds What has become increasingly evident to CQR and SCP in recent years is the relative underperformance of Freestanding centres, particularly those in non-metro locations with underperforming supermarket anchors (with a skew to Woolworths). Notably, because these centres have challenging (negative in some instances) income growth prospects which combined with pricing metrics which have surpassed pre Financial crisis levels, SCP-CQR Merger? 12

13 CQR and SCP expect these centres are likely to deliver sub-par IRR s looking ahead and understandably see better relative value from neighbourhood and sub-regional centres. New acquisitions are struggling to meet the already reduced IRR thresholds Notably, transactional yields for the types of retail assets that CQR owns appear to have converged (Figure 24) despite the increasingly divergent growth prospects. Fundamentally, this suggests discount rates have reduced to a greater extent for lower growth retail assets. This in part reflects the fact that lower value (smaller) shopping centres typically attract a larger pool of potential buyers. Tough to justify on-market acquisitions Based on recent direct market transactional evidence and SCP & CQR's most recent portfolio revaluations, we struggle to see how these Groups can achieve their 8.5% unlevered IRR targets for new acquisitions. We note that these targets have already been reduced from 10%+ and in the case of CQR's recent acquisition of Arana Hills, the forecast IRR was actually slightly below the 8.5% threshold. It s worth highlighting that CQR typically assumes a terminal cap rate in-line with the acquisition cap rate. We note that the 6.0% acquisition cap rate for Arana Hills is 25bp tighter versus the market peak in 2007 for sub-regional centres and 130bp tighter than the 15yr average. As a sensitivity, we estimate that 50bp of cap rate expansion sees the IRR reduce to ~6.2%. To illustrate this, we have detailed our estimated 5-year un-levered IRR's (including transaction costs) based on sensitivities, which include various rent growth and exit cap rate outcomes (Figure 25). Figure 25: Credit Suisse estimated IRR for neighbourhood centre acquired on 6.15% initial yield (including transaction costs) IRR (Neighbourhood) Anchor Sales Growth Source: Credit Suisse estimates Exit Cap Rate 6.20% 6.40% 6.60% 6.80% 7.00% 1.0% 7.6% 7.0% 6.5% 6.0% 5.5% 1.5% 8.1% 7.5% 6.9% 6.4% 5.9% 2.0% 8.5% 7.9% 7.4% 6.9% 6.3% 2.5% 8.9% 8.3% 7.8% 7.3% 6.7% 3.0% 9.3% 8.8% 8.2% 7.7% 7.2% CQR represents better value than direct market acquisitions for comparable assets We estimate CQR's portfolio would generate an un-levered IRR of % Similarly, we note that Neighbourhood centre property risk premiums (spread between cap rates and real bonds) no longer screen attractive relative to long run average levels on the back of significant yield compression and the recent spike in real bond yields (Figure 26). We fundamentally believe that over the long run, most real estate should provide inflation type growth, as such we compare yield (cap rates) to real bonds to estimate property risk premia. However, CQR's assets could yield a more attractive % IRR The stamp duty savings associated with a merger transaction between SCP and CQR combined with the corporate overhead savings, effectively means that SCP is acquiring CQR's assets on a post transaction cost cap rate of 6.33% vs a December 2016 book cap rate of 6.42%, on our estimates. Whilst this appears expensive to us, we accept that there is some relative value compared to acquiring comparable assets on market. We estimate that based on this pricing and the benefit of stamp duty savings, CQR's portfolio is likely to yield a 5yr un-levered IRR of % (based on no change to the exit cap rate). SCP-CQR Merger? 13

14 Figure 26: Neighbourhood centre property risk premium PRP = cap rate less real bond 9.0% 8.0% 7.0% Neighbourhood Property Risk Premium Historical average 6.0% 5.0% 4.0% 3.0% 2.0% Source: JLL Research, Reserve Bank of Australia, Credit Suisse estimates Merger pricing and considerations A merger would create more value than it destroys on day 1 Merger makes strategic and financial sense for both SCP and CQR investors A scrip-based merger between these Groups would create a more relevant investment proposition for both debt and equity investors. At current pricing, we believe a merger would be both earnings and value accretive for both CQR and SCP shareholders. Whilst medium term earnings (FFO) accretion will be greater for SCP investors (~13-19%), CQR investors should benefit from markedly higher (lower) "realised" NAV/NTA creation (dilution) going forward with minimal NTA erosion from this transaction (CSe ~1%). Below we detail key standalone valuation (/pricing) metrics for SCP and CQR and have incorporated the impact (NTA and cap rate) of post balance date (June 2016) portfolio revaluations announced by both Groups for the 6 months to December Figure 27: SCP and CQR standalone valuation summary SCP.AX CQR.AX 1mth return 4.8% 4.1% 3mth return 0.2% 2.9% 12mth return 13.0% 12.6% Share Price (last close) $2.19 $4.20 Target Price (SOTP) $2.04 $4.00 Premium/(Discount) to TP 7.4% 5.0% Market capitalisation A$m 1,608 1,706 FY17 FFO ps (based on guidance) FFO Yield 6.58% 7.24% FFO Multiple Avg FFO Multiple since SCP listed (Oct-12) Premium (discount) 10.5% 3.9% Weighted average cap rate (Dec-16) 6.62% 6.71% Implied cap rate 6.33% 6.06% Implied cap rate (compression) / expansion -0.29% -0.65% Adjusted NTA ps (December 2016) $2.14 $ Premium to NTA 2.3% 2.4% Source: Company data, IRESS, Credit Suisse estimates SCP-CQR Merger? 14

15 MergeCo worth $2.10 (CY17 SOTP) Based on current pricing, we estimate MergeCo is worth $2.10 per security (Figure 28) based on our CY17 sum-of-the-parts ("SOTP") or Net Asset Valuation ("NAV"), which represents a slight premium to both our standalone SCP Target Price ($2.04) and the equivalent value of CQR's scrip based on our $4.00 standalone target price (both based on a SOTP valuation methodology). Moderately NAV accretive and broadly NTA neutral on day 1 We note that our estimate of proforma (30 June 2016) NTA per security of $1.95 (or $2.15 including December revaluations) for MergeCo is moderately accretive for SCP investors (~1%) and slightly dilutive for CQR investors (~1%). On our estimates, proforma lookthrough gearing for MergeCo would be ~37%, slightly above the mid-point of the 30-40% through-cycle target range for both these Groups. Figure 28: MergeCo sum-of-the-parts valuation (CY17) MergeCo Net As s et Valuation (CY17) Book Value Book WACR / Mutiple Applied WACR / Multiple Grow th Balance sheet portfolio - CQR 2, % 6.40% 3.0% 2,272.1 Balance sheet portfolio - SCP (Australia) 1, % 6.62% 3.0% 2,047.9 CQR post balance date retail net acquisitions % 6.00% 3.0% 69.1 SCP post balance date retail net acquisitions % 6.85% 3.0% Retail portfolio 4, % 6.51% 3.0% 4,571.2 Value Development WIP - CQR 62.7 na na 0.00% 62.7 Development WIP - SCP 7.9 na na 0.00% 7.9 JV Stakes - CQR na na 10.00% JV Stakes - SCP 8.1 na na 10.00% 8.9 SCP stake in CQR (4.9%) 83.4 na na na na Funds Mgmt Fees - SCP na x na Net derivatives - CQR 15.9 na na na 15.9 Net derivatives - SCP 81.1 na na na 81.1 Total As s ets 4, ,005.2 Net other assets - CQR na na na Net other assets - SCP na na na Debt - CQR na na na Debt - SCP na na na Transaction costs (2.0% deal value) na na na Total debt -1, ,736.4 CQR corporate costs na x na P&L related cost synergies na x na SCP corporate costs na x na Total corporate cos ts x Total Liabilities -1, ,907.3 NTA / NAV 2, ,097.9 Shares on issue - SCP Shares issued to acquire remaining 95.1% of CQR Proforma Shares on issue 1, ,474.2 NTA / NAV per s hare Source: Credit Suisse estimates SCP-CQR Merger? 15

16 MergeCo NAV key assumptions Our merger NAV has been adjusted to include the book value uplift associated with the extensive portfolio revaluations undertaken by both Groups and announced in December 2016 in addition to capturing a further 12 months income growth (3.0%). Beyond this, our NAV captures the future value of other balance sheet items based on our explicit forecasts. For example, we have incorporated the impact of post balance date transactional activity (acquisitions and disposals) for both SCP and CQR. Transaction costs based on 2% of dealvalue Unlikely to retain CHRP1 & CHRP2 but valuation neutral regardless Merger transaction costs & synergies Similarly, we have also captured the negative (NTA/NAV dilutive) impact of merger-related transaction costs (~$66m or 2% of transaction equity value) as well as the offsetting value creation associated with corporate overhead cost synergies. Our transaction costs implicitly include advisor and legal related costs in addition to potential make whole costs relating to CQR's ~$430m of USPP debt. However, as we saw during the DXS-IOF merger process, CQR's debt investors may be willing to waive a change of control given the potential improvement in MergeCo's credit quality. However, our estimates do not explicitly include a facilitation payment to Charter Hall Group as we saw when DXS acquired CPA ($41m or 1.1% of assets) in 2014 by way of a scheme of arrangement. SCP in theory could put forward a resolution to vote out CHC as the responsible entity to be successful, SCP would need to attain >50% of the vote (and could vote their 6% stake, whereas CHC would not be able to vote its 17.7% stake). Our NAV synergies of $126m is based off the 9x multiple we apply to CQR's corporate costs, which we have assumed can be entirely removed given they largely relate to responsible entity fees and additional listed costs (e.g., director and registry fees). CHRP 1 and CHRP2 For the purpose of this analysis and simplicity, we have assumed MergeCo retains CQR's 49% joint-venture ($222m book value) aggregate stakes in CHRP1 & CHRP2. Combined, these funds own $770m (CQR share $378m) of retail assets. CHC would be reluctant to lose this FUM and realistically would look to exercise its preemptive rights either with its own balance sheet or through existing or new third party capital sources, in our view. We have assumed the remaining 95.1% of CQR scrip is funded through the issuance of million additional SCP units based on spot pricing (implied scrip ratio of 1.92 SCP share for every CQR share) for both Groups (i.e. no bid premium) albeit also detail the issuance impact on both earnings and valuation under a 5% and 10% bid premium scenario in Figure 29 and Figure 30. Figure 29: SCP to fund remaining 95.1% of CQR with its own scrip Bid premium (ex 4.9% stake) 0% 5% 10% CQR share price $4.20 $4.41 $4.62 Premium to NTA 2.4% 7.6% 12.7% CQR number of securities mn CQR Implied cap rate (pre-synergies) 5.96% 5.73% 5.51% CQR Implied equity value $m 1,622 1,704 1,785...Implied scrip ratio SCP share price $2.19 $2.19 $2.19 SCP number of shares on issue Equity issuance % of existing shares 100.9% 106.0% 111.0% SCP u/holder ow nership of merged entity 49.8% 48.6% 47.4% CQR u/holder ow nership of merged entity 50.2% 51.4% 52.6% SCP Proforma shares on issue 1,475 1,512 1,549 Source: IRESS, Credit Suisse estimates SCP-CQR Merger? 16

17 Whilst our base case estimates do not assume any control premium we note that the transaction would still be value (NAV) and earnings accretive for both SCP and CQR investors up to a 10% bid premium or an implied scrip ratio of 2.11 SCP securities for each CQR security. Notably, NTA dilution for SCP investors associated with merger transaction costs would be more than offset by issuing scrip at a considerable premium to NTA (both June and December 2016). Whereas for CQR investors, we estimate the deal would be slightly NTA dilutive at spot pricing but accretive with a bid premium of at least 5%. As such, we believe a transaction within this pricing vicinity makes strategic and financial sense for both investors (relative to the status quo) with relatively low execution (/implementation) risks arising from the highly complementary asset base and capital structures. Figure 30: Merger valuation and earnings sensitivity Bid premium 0% 5% 10% CQR bid price Implied scrip ratio Premium to CQR NTA (Dec-16) 2.4% 7.6% 12.7% Stand-alone SCP NAV MergeCo NAV MergeCo NTA (Dec-16) SCP FY18 FFO ps accretion (base case) 12.3% 9.5% 6.9% CQR FY18 FFO ps accretion (base case) 3.2% 5.7% 8.1% Figure 31: SCP-CQR share price performance and implied scrip ratio $6.00 $5.00 SCP.AX CQR.AX Scrip ratio (RHS) $ $ $ $ $0.00 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep Source: IRESS, Credit Suisse estimates Makes more sense than status quo Still fundamentally expensive SCP trades at a 4% premium to our $2.10 MergeCo valuation, therefore MergeCo is simply less expense relative to SCP and CQR on a standalone basis. On our estimates, MergeCo trades at a 9% premium to its commercial real estate book value at 30 June 2016 compared with 11% for CQR, 12% for SCP and 6% on average for the A-REIT sector (arithmetic basis). However, if we were to include the December revaluation gains for SCP and CQR for MergeCo, the premium reduces to 3%. So whilst we see merit in a merger for existing CQR and SCP investors relative to the status quo, we continue to see better value and growth prospects elsewhere in the context of the A-REIT sector. Specifically, our large cap top picks are SCG, WFD, MGR and GMG. SCP-CQR Merger? 17

18 But still see better value and thematic appeal elsewhere Whilst these stocks appear attractive on our valuation screens they also have thematic appeal, particularly if long duration bond yields and in turn cap rates are no longer a tail and if anything a mild headwind. In this scenario, our preferences are aligned to real estate business models which not only own quality, scarce and growth generative assets but can leverage their development expertise and track record to generate meaningful value from the underlying real estate through-the-cycle, as opposed to simply riding the cap rate cycle. Figure 32: Share price implied premium / (discount) to book value of commercial real estate Based on 30 June 2016 (navy blue shading) and December 2016 (light blue shading) book values 20% 15% 10% June-16 revals MergeCo 5% 3% premium to book based on current pricing 0% -5% -10% BWP SCP CQR AOF DXS IOF MergeCo CMW GPT VCX SGP SCG GDI PLG MGR Source: Company data, IRESS, Credit Suisse estimates MergeCo Financial Forecasts Our MergeCo earnings estimates (FY17-20) and accretion for SCP and CQR investors is detailed in Figure 33 and our specific merger adjustments are shown in Figure 34 using FY18E as the base year. Merger-related property mgmt savings could mean material earnings upside More earnings accretive for SCP investors Under our base case scenario, SCP investors will achieve earnings (FFO) per share accretion of ~12.8% (FY18-20 average) compared with ~4.5% for CQR. However, in our view, the primary attraction for CQR investors is the enhanced NAV creation prospects, which should translate to superior total returns for investors going forward. Our base case does not include any property management fee savings Our proforma estimates include the funding drag associated with transaction costs in addition to corporate overhead savings (synergies) we assume the merged entity could run CQR's portfolio with zero incremental corporate cost as the costs associated with managing the assets are incurred at the property level. If anything, we believe there is considerable upside on this front but is not incorporated in our estimates. Furthermore, on a merged basis, there may even be scope to extract additional property level savings from SCP's portfolio as a result of taking property management in-house given the considerably larger $4.9bn merged asset base. We have also not assumed any re-financing benefits (not that they would be material given these Groups have already been relatively active on this front). SCP-CQR Merger? 18

19 Again, the loss of JV stakes is not a big deal in the long run As highlighted in the valuation section, we have assumed MergeCo retains CQR's jointventure 49% ($222m book value) aggregate stake in CHRP1 and CHRP2, which combined own $770m (CQR share $378m) of retail assets. Whilst MergeCo would realistically lose this FUM, the 6.5% return on equity (2H16 annualised basis given Bateau Bay transaction in 1H16) generated by this stake would not be overly difficult to replace, in our view. Figure 33: MergeCo P&L and earnings accretion for SCP & CQR investors Base case assumptions include zero property management fee savings Proforma P&L CQR NPI (Incl JV) SCP NPI Funds Management Income EBIT CQR net interest expense SCP net interest expense Transaction cost funding Corporate overheads Tax expense Funds From Operations Shares on issue 1, , , ,474.2 FFO/sh proforma FFO/sh growth 6.0% 4.4% 1.9% SCP FFO/sh - standalone Accretion - SCP investors 11.1% 12.3% 13.5% 13.8% CQR FFO/sh - standalone Scrip ratio MergeCo FFO per CQR share Accretion - CQR investors 0.6% 3.2% 3.8% 5.2% Source: Credit Suisse estimates Figure 34: MergeCo FY18 FFO reconciliation MergeCo FY18 P&L CQR SCP Adj MergeCo Balance sheet and fund NPI Funds mangement income Earnings before interest & tax Net interest expense Corporate overheads Tax expense Funds From Operations Shares on issue ,474.2 FFO/sh Source: Credit Suisse estimates Potential synergies in focus a closer look at the fees As highlighted earlier in the research, we estimate CQR has paid $158m of related party and other transactional fees over the past four years (FY13-16) to Charter Hall Group (CHC.AX). SCP-CQR Merger? 19

20 Figure 35: Related party fees to Charter Hall Group Fees paid to CHC Property mgmt & fund related fees Responsible Entity Fee Other Other related party fees Total Period A$m A$m A$m A$m A$m FY FY FY FY Total In FY16, CQR paid $43m of related party fees to CHC which equates to 170bp of gross asset values or 250bp of equity market capitalisation. $18.0m of this related to property management, development, leasing transactional and fund (debt, due diligence, accounting) related expenses whilst a further $11.4m related to the reimbursement of other centre and property management (i.e. salaries, finance and IT) expenses incurred. In relation to the latter, we note that only 40% of this was recovered from tenant outgoings in FY16 (38% in FY15). For reference, fees are detailed in the appendices (p.22). SCP's property management fees appear markedly less onerous NVN and WRT highlight the potential prop mgmt fee savings We understand that SCP's property expenses in FY16 included a total fees of $12m, $9m of which relates to centre level costs plus $3m for asset management and leasing expenses. Interestingly, despite the fact that SCP's comparable property expenses appear markedly lower, we note that SCP's property management is outsourced which means that its expenses include a margin, albeit, not likely to be a big one. Earnings accretion may be much greater depending on property mgmt fee savings Whilst we have not assumed any property management fee savings in our base case estimates for MergeCo, we note that based on the savings realised by CFX (NVN) and WRT (SCG), our earnings accretion estimates for both SCP and CQR shareholders is likely to be materially understated. We note for example that the upside realised by SCG (relative to WRT) and Novion (relative to CFX) at the net property income line was 7.4% (average) as a result of their respective internalisations as illustrated in Figure 36. Figure 36: Property management fee savings realised by NVN & WRT Property management fee savings CFX WRT Net property income Property management fee saving Proforma net property income NPI upside realised 8.1% 6.6% And upside to dealrelated earnings accretion Almost all went straight to the bottom line for NVN As it did for Scentre Group Furthermore, in the case of NVN, we know from the NVN-FDC merger documentation that when NVN re-stated its FY15 P&L (for comparability purposes with FDC) $39.1m of internally charged property management fees were deducted from both the NPI and the corporate overhead line items (this is for NVN only and includes no FDC merger-related synergies). Notably, NVN's net property income was 8% higher ($617.2m) in FY15 relative to the prior year (when the $43m of property management fees were disclosed), therefore by grossing up the property management fees by this amount we can back solve the margin generated or net fee saving (post recoveries from the tenant) detailed in the below workings. NVN's FY15 internally charged property management fee: $43m * 1.08 = $46.4m (i.e. FY16 property management fee). Therefore, we can deduce that as a result of NVN's internalisation, NVN realised 85 cents in the dollar ($39.1 / $46.4m) from property management fee savings. SCP-CQR Merger? 20

21 Similarly, in the case of Scentre Group, we know from the Westfield Group and Westfield Retail Trust transaction documentation that most if not all of the $55m of property management fee savings as a result of WRT's internalisation dropped to the bottom line. This is highlighted in the independent experts report (WDC securityholder booklet page 24), which shows that WDC's Australia and New Zealand property investment income of $938m (forecast for year ending December 2014) included this $55m, yet this figure was already "net of all operating costs" and that "costs associated with property management are charged back to the shopping centres". On this basis, if we were to assume the same level of upside (6% = 7.4% * 0.85) is extractable from CQR's portfolio, this would result in an additional $12m of NPI in FY18E, which would increase FFO ps accretion for SCP investors from 12.3% to 17.6% and from 3.2% to 8.0% for CQR investors. The table below (Figure 37) includes the proforma accretion for SCP and CQR shareholders based on our estimates of potential upside at the net property income line for CQR's portfolio as a result of merger-related property management fee savings. Figure 37: MergeCo P&L and earnings accretion for SCP & CQR investors including property management fee savings Proforma P&L CQR NPI (Incl JV) Propery mgmt fee savings SCP NPI Funds Management Income EBIT CQR net interest expense SCP net interest expense Transaction cost funding Corporate overheads Tax expense Funds From Operations Shares on issue 1, , , ,474.2 FFO/sh proforma FFO/sh growth 5.9% 4.5% 2.1% SCP FFO/sh - standalone Accretion - SCP investors 16.3% 17.6% 18.9% 19.4% CQR FFO/sh - standalone Scrip ratio MergeCo FFO per CQR share Accretion - CQR investors 5.3% 8.0% 8.8% 10.3% Source: Credit Suisse estimates Figure 38: MergeCo EPS accretion for SCP Figure 39: MergeCo EPS accretion for CQR 25.0% 12.0% 20.0% 15.0% SCP - base case 11.1% 16.3% SCP - 6% fee savings for CQR 18.9% 19.4% 17.6% 13.5% 13.8% 12.3% 10.0% 8.0% 6.0% CQR - base case 5.3% CQR - 6% fee savings for CQR 8.0% 8.8% 5.2% 10.3% 10.0% 4.0% 3.8% 3.2% 5.0% 2.0% 0.6% 0.0% % Source: Credit Suisse estimates Source: Credit Suisse estimates SCP-CQR Merger? 21

22 Appendices CQR related party fees Note these fees are in addition to Responsible Entity and other corporate (e.g., registry and director fees) Figure 40: CQR FY16 accounts related party fees to Charter Hall Group (CHC.AX) Source: Company data SCP-CQR Merger? 22